Filing Taxes for “Tax-Exempt” Non-Profits

by Sean Bryant on February 27, 2014

You’ve filed for the federal tax exemption, and your nonprofit organization has been approved. At this point, you can put the IRS paperwork aside and focus on your volunteer organization, or can you? Being tax exempt is not as straightforward as it sounds, as most nonprofits still have to pay some taxes. Here is a quick breakdown of what Uncle Sam expects from your “tax-exempt” organization.

Federal Taxes

As long as the purpose of your organization is charitable, educational, scientific, or literary, you can collect more money than you need to run your nonprofit. Whether or not those extra funds can be taxed depends on the nature of the activities that generated the money and how those activities are related to your organization’s purpose. As a rule of thumb, related activities aren’t taxed, but unrelated ones are.

If you make a profit from a related activity, you can put that cash into your general operating fund. For instance, according to Nolo, the Friends of the Library, a nonprofit organization dedicated to promoting literature makes money from speeches as well as book sales. Those funds can be used to run the organization. They can be used to pay utilities, cover payroll, buy new supplies, or advertise for more donors, but they can’t be distributed to the officers, directors, or volunteers connected to the organization.

If your organization makes more than $1,000 in an activity unrelated to its purpose, you will need to pay corporate income tax on those funds. Be careful of how many unrelated activities you do. If those activities eventually overwhelm your organization, the IRS may reconsider your tax-exempt status.

At times, it is difficult to determine the difference between related and unrelated activities. For that reason, the IRS has made a list of activities that are tax exempt, even if they don’t seem to be directly related to your organization’s purpose:

Activities that are exclusively or primarily run and organized by volunteers

Activities that are carried about for the benefit or enjoyment of the people being served by the organization—an example of this is a gift shop used primarily by patients and visitors in a nonprofit hospital

Sale of donated merchandise

Rental or sale of your donor list

The distribution of small token gifts to thank people who have donated to the organization

State Tax

Simply because your organization’s taxes are considered to be exempt by the federal government doesn’t make them exempt from state taxes. Tax laws different from state to state. In Washington state, for example, nonprofits are taxed just like any other business, according to the Washington Department of Revenue. Nonprofits in that state pay business and occupation tax on revenue, sales tax on goods that they purchase, and retail sales tax on goods that they sell.

Payroll Taxes

If your nonprofit is exclusively run by volunteers, you won’t have to worry about payroll taxes, but if you have even one employee on the books, you will have to pay federal and state payroll taxes, as Idealist reports. Although similar to the payroll taxes paid by private organizations, payroll taxes for nonprofit employees are slightly confusing, and organizations may want to use special software, such as Intuit Payroll, to help them organize their taxes.

Time to File with Uncle Sam

When it’s finally time to file your taxes, you’ll need to grab all of your records. Throughout the year, you should have collected receipts and records of every bill you paid, every payroll check you wrote, every purchase you made, and every dime you collected. You can stick all of this in a shoebox throughout the year and pay an expert to untangle it during tax season, or you can simplify the process using software that lets you organize all of your data as its generated. GruntWorx organizes and labels scanned tax documents in a PDF file. By going paperless you not only save space, but you’re able to find documents more easily as well.

According to the IRS, your non-profit needs to file form 990. In addition to the standard form 990, there is the 990-EZ Short Return, the 990-PF Private Foundation Form, and the 990-N e-postcard for nonprofits whose gross receipts are less than $25,000. You can print out, fill out, and mail in the correct form, or you can file electronically. To file electronically, download the forms to your computer, fill them out, and ship them to the IRS electronically. If the forms are too cumbersome, there are tax professionals or software that can lead you through the process. If you’re filing late, fill out the 8868 Extension form, and if you are a political organization, you need to grab the 1120-POL.

Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.

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